Credit for Public Interests

Do Bankruptcy Claims Involve Any Other Public Interests?

They certainly can! So far we have been talking about straightforward bankruptcies, with debtors, general creditors and secured creditors. There are other considerations that can make things more complicated. Environmental regulations are a good example. It seems that recent court cases have ruled that assets recovered in bankruptcies should be used to correct environmental hazards ahead of paying other creditors.

Why Should Environmental Cleanups Come Before the Paying the Creditors?

The Environmental Protection agencies are concerned that business owners will simply abandon their offending properties rather than invest the money to do the proper clean-up. This would leave the expense to the state, or new property owner.

Did This Ever Happen?

There was one case where a trustee for a Chapter 7 bankruptcy claim did attempt to abandon a hazardous waste site that required $5-$10 million worth of clean-up which was more than the value of the facility. This would have left a worthless “shell”, leaving someone else to clean up the property or incur large fines.

The Supreme Court upheld that abandoning a property did not release the owner of the obligation to follow the state cleanup regulations, created for the protection of health and safety.

It dismissed the Chapter 7 bankruptcy case on the request of the U.S. Trustee and the Township who were also 75% of the creditors. Therefore, recovered assets would be directed into the cleanup needed to comply with environmental standards.
This seems to mean that compensating creditors comes after the enforcement of environmental standard. The Supreme Court said it was not deciding that issue and in this case, the main creditor was the City of New York who did not protest the issue, since it had already paid 2.5 million to clean up the property.

What Happened in other Court Cases?

The Supreme Court decision has affected decisions from lower courts. Another court concluded that Supreme Court "has effectively rewritten the relevant statutory provisions. It ruled that a Chapter 7 trustee could not abandon and was required to spend the assets needed to decontaminate a site before other debtors were paid.

Other courts disagree. They don’t think that the environmental expenses incurred in the pre-bankruptcy period should be a post-bankruptcy expense that comes out of the estate. I n re Pierce Coal and Construction Inc, the recovery of strip-mined land was the responsibility of the Chapter 11 who now owned the land and the Chapter 7 trustee. The company was not liable for the effects on the land before bankruptcy.

Some people have found a way around the problem. One way is to justify the reason why the debtor disposed of the property. If they have been charged with a health hazard which is not actually found, the debtors may abandon the property.

If the debtor is leasing the property, the landlord may have to assume the costs of cleaning up the site.

Another court concluded that the cleanup was an administrative cost to be handled by the Chapter 7 trustee. It concluded that the either the innocent taxpayers or innocent creditors would absorb the costs and that the burden was best put on the creditors. However, a line was drawn with the secured creditors.

What Happens if Clean-Costs Consume All the Assets?

Another court decided that if all the assets went to cleanup and the Trustee could not abandon the property that a pre-bankruptcy state order would stand, requiring a $2 million clean-up of ground water.